The importance of trust in business

All mainframe sites face the same problem that they’ve been facing for 50 years. Do you buy the best piece of software available for one specific job, for example a piece of monitoring software, or do you buy most of your software from a single vendor because you expect that each piece of software will work with the other software from that same vendor?

Then there’s the issue of whether to buy a piece of software that does everything that you want it to do at the moment, but also comes with a whole load of other facilities and features built-in that you might want to use in the future (or might not). Or do you go for a cheaper software package that does exactly what you want and no more. Might you want it to offer additional features at some time in the future?

And does it really matter? At the end of the day, isn’t the whole point to get your work done? Whoever looks after the budget would like that to be done as cheaply as possible. For you, as long as the software you use does the job, it doesn’t really matter who supplied it, does it?

That last thought seems to have been the attitude of IBM in its dealings with AT&T. And the consequence has been that IBM has been ordered to pay BMC Software $1.6 billion for fraud and contract violations. And all IBM did was migrate AT&T away from BMC’s products to its own.

So, here’s the story. In 2007, AT&T were using BMC’s software. In 2008, IBM and BMC drew up a contract that governed the business relationship between the two companies. In 2015, the companies agreed some amendments to the contract. One of those was an Outsourcing Attachment (OA) that was meant to prevent IBM from migrating customers of both companies to using their own software. Oh dear!

Later in 2015, IBM started an internal initiative called Project Swallowtail to migrate AT&T from BMC’s software to its own. In 2017, BMC sued IBM, claiming that IBM already planned to breach their agreement and poach AT&T’s software business when the two companies renewed their power-sharing deal in 2015. IBM argued that AT&T rejected BMC’s products and chose to use IBM’s for its own reasons, which it claimed was fair game under its pact with BMC. What actually happened was AT&T replaced 14 BMC software products with IBM products. There were also five BMC products that were replaced by third-party software, and one BMC product was retired.

And in 2022, US District Judge Gray Miller finally gave his decision on the case. IBM was ordered to pay BMC Software a whopping $1.6b. The ruling came after a seven-day non-jury trial in March.

Why were the damages awarded against IBM quite so punitive? According to the written findings, “The court finds by clear and convincing evidence that IBM fraudulently induced BMC into entering the 2015 OA so that it could exercise rights without paying for them, secure other contractual benefits, and ultimately acquire one of BMC’s core customers”. It goes on to say that IBM did this intentionally.

The report also says that BMC were happy with the 2015 amendments because they thought that it “would put IBM’s troubling history of non-compliance to bed”. Sadly, it didn’t, and IBM appears to have taken AT&T’s custom away from BMC.

The judge also wrote “IBM’s business practices – including the routine eschewal of rules – merit a proportional punitive damages award”.  Later the judge said IBM “believed – especially in light of BMC’s reluctance to engage in litigation – that it could ‘always settle for a small percentage of the claim, or for ‘pennies on the dollar’”. Finally, he wrote, IBM’s conduct vis-à-vis BMC offends the sense of justice and propriety that the public expects from American businesses.”

Did IBM own up and say, “it’s a fair cop”? No, what they said was IBM has “acted in good faith in every respect in this engagement”. IBM went on to say, “This verdict is entirely unsupported by fact and law, and IBM intends to pursue complete reversal on appeal”. IBM also asserted, “The decision to remove BMC Software technology from its mainframes rested solely with AT&T, as was recognized by the court and confirmed in testimony from AT&T representatives admitted at trial”.

If you want to know how Judge Miller got to the figure of $1.6b. He awarded $717,739,615 in actual contractual damages, $168,226,367.29 in prejudgment interest, and another $717,739,615 in punitive damages. He then added on post-judgment interest of roughly 2%, compounding per annum. That give a total of $1,603,705,597.29.

It wasn’t all good news for BMC. The judge rejected their bid for findings of lost profits, additional breaches of contract, and unfair competition. However, and I don’t know how unusual this is in US courts, the judge said that if a reviewing court finds that BMC isn’t entitled to the judgment he issued, the company could come back and seek recovery under one of its alternative legal theories.

Definitely an interesting case. I’m sure we’re going to hear more about it.